The changing shape of ocean alliances

On April 1, 2017, which was the start of the contract season, the four ocean carrier alliances reorganized to form three alliances, making up more than 77% of global container capacity and 96% of trans-Pacific container capacity. Thanks to an unprecedented number of mergers and acquisitions in 2016 forced by a glut of excess capacity causing rates to bottom out, the alliances are a way for carriers to offer the same or better services with less risk and less operational cost.

How did we get here?

The market-wide investment in supersize ships was originally a boon to carriers as it lowered their per container cost, but as more carriers invested in larger vessels, capacity skyrocketed, supply outpaced demand and the prices tanked. Container demand was unable to continue growing at an average of 4% per year once China’s growth began slowing in 2010.

The first, and the largest, casualty from the pricing crash came when Hanjin collapsed in August of 2016, after months of attempted debt restructuring. This left the supply chain industry in a state of chaos as Hanjin vessels were barred from docking due to their inability to pay port fees. The threat of container seizures led to a panicked scramble as shippers tried to locate and acquire their cargo from the Hanjin vessels.

Who are the alliances?

  • 2M: Maersk and MSC (in a vessel sharing agreement with HMM) which has 29.5% of the global market share. They may see this rise to 33.4% if Maersk’s plan to acquire Hamburg Sud is approved.
  • THE Alliance: Hapag-Lloyd (merging with UASC), KLINE, MOL, MYK, and Yang Ming which has 16% of the global market.
  • Ocean Alliance: CMA, COSCO, Evergreen, and OOCL which has 26% of global container capacity

What are alliances?

It’s important to note that these alliances aren’t mergers between companies to form enormous super carriers. Instead, these alliances are a cooperative agreement that forms a strategic alliance to cover major trade routes as no single carrier can provide service to every trade lane and every port every week. By sharing common resources, shipping alliances are able to cut variable expenses.

How do the alliances help?

Carriers can offer more sailings with fewer vessels, relying on their partners to pick up any slack and cover any trade lanes that are not serviced to better benefit customers, reduce congestion at ports, and lessen environmental impart. Alliances also offer an internal support and financial stability as operational costs decrease and allows for a much better allocation of resources as they create economies of scale. Alliances are also able to keep cargo moving in the event of a carrier bankruptcy thus preventing calamity for shippers.

Is this an oligopoly?

No. While alliances can use their immense size to negotiate with marine terminal operators who agree to that arrangement, the alliances cannot share cargo or customer information or rates within the alliance and must negotiate independently and avoid collusion in the market.  Eventually, as port alliances begin to take shape, there is the chance they’ll prefer to negotiate alliance to alliance with carriers, but currently only MTOs even have the option. These alliances can and likely will reconfigure again as the market changes and new lanes take precedence and carriers find better, more effective collaborations.

Where does that leave us?

As 2016 was a turbulent year in the ocean landscape, marked by rapid industry consolidation and painfully low rates due to overcapacity, the final formula for alliances may need more adjusting before finding a progressive mix of growth and stability. However, for now, alliances aim to protect both the carriers and shippers while the market settles and we discover what business as usual means for ocean freight once again.